At the beginning of 2014, Utilitywise (LSE: UTW) was riding high. Then concerns over the company’s business model began to surface and shares in the utility services firm began to slide. Today, at just over 110p, shares in the company are down a full 70% from their peak of 367p reached at the beginning of 2014.
However, after these declines shares in Utilitywise look exceptionally cheap and support a dividend yield that is near twice the market average. Indeed, the shares now trade at a forward P/E of 6 and support a dividend yield of 5.8%. The dividend payout is covered more than twice by earnings per share. Further, analysts have pencilled in earnings per share growth of 16% for the fiscal year ending 31 July 2017, followed by growth of 13% for the following fiscal year. The dividend payout is expected to grow by 10%, leaving the company yielding 6.3%.
So, why is the market avoiding Utilitywise? The company has taken plenty of flak in recent years over the way it books customer transactions and recognises revenue. Utilitywise tends to book sales early before it receives payment from customers, a risky strategy, especially when most of the company’s customers are small businesses. With a Brexit-inspired economic slowdown on the horizon, investors have taken fright, as small businesses are usually the first to feel the pain in a recession.
Restoring confidence
However, management is trying to restore confidence in the company. Alongside the group’s most recent set of results chief executive officer Brendan Flattery declared that the firm has decided to end the practice of taking cash advances from suppliers. A number of prior-period restatements and the non-cash impairment of Utilitywise’s investment in t-Mac were also implemented to help “improve the transparency of the balance sheet.
As yet, the City seems unconvinced, but it’s clear that management is trying to improve the group’s reputation. Utilitywise’s low valuation may discount some of the risk of investing in the firm as it attempts to rebuild and that’s why the company is on my watchlist.
Set for a rebound?
Bonmarché (LSE: LSE) is another company that’s fallen on hard times and after recent declines looks cheap. Over the past two years, shares in the company have lost nearly 70% and currently trades at a forward P/E of 7.6, supporting a dividend yield of 7.5%. The payout is covered 1.8 times by earnings per share.
Bonmarché’s stock collapsed during 2016 as management slashed earnings expectations. From a high of 21p, earnings per share plummeted to 10p for the year ending 1 April 2017. After this downgrade, it’s clear why the shares took a tumble. However, City analysts expect the group to return to growth of this fiscal year with earnings per share growth of 27% pencilled in and further growth of 21% expected for the following fiscal year.
If the company can hit these targets, then the shares look exceptionally cheap on both an income and growth basis. If management fails once again, then the shares could have further to fall. But its already low valuation may help limit the downside.
